The Hidden Economic Cost of Climate Change

Recent extreme weather in southern England has made the impact of the climate crisis very clear. While many people have focused on the immediate discomfort of high temperatures or the closing of schools, experts are now looking at the long-term economic consequences. A new report from TheCityUK, a finance industry group, and comments from Bank of England economist Swati Dhingra, show that the climate crisis is creating serious challenges for the UK economy.

The core of the problem lies in how insurance works. Traditionally, insurance companies use past data to predict the likelihood of future disasters. However, as wildfires and floods happen more often and become more severe, these old methods are no longer reliable. The Guardian reports that this makes it difficult for insurers to set fair prices for their services. As a result, a 'protection gap' is growing, which means more homeowners and business owners are unable to find affordable insurance to protect their property and livelihoods.

This is not just a problem for insurance companies. According to TheCityUK, insurance is essential for the economy because it encourages investment. When businesses cannot get insurance, they are less likely to invest in new projects. The report warns that this is a foundational concern for the entire financial system. If banks and investors cannot trust that assets are protected, they may stop lending money or investing in certain areas. This could lead to a difficult cycle where a lack of spending on climate protection leads to higher damage costs, which then makes future investment even more expensive.

Beyond the insurance sector, the climate crisis is also affecting the cost of living. Swati Dhingra noted that extreme weather events around the world are a major cause of inflation—the general increase in prices over time. For example, in 2025, the price of chocolate rose significantly because of extreme heat in West Africa. Because chocolate is a common item in the UK food basket, this one product added about 1 percentage point to food inflation. This shows that what happens in distant countries can have a direct impact on the wallets of people in the UK.

Further research from the Energy and Climate Intelligence Unit supports this view. Their analysis found that 13% of food imports to the UK last year came from countries that are very vulnerable to extreme weather. These imports include essential items like rice from India and various types of fruit. When these countries experience droughts or heavy rains, the supply of food decreases, and prices in UK supermarkets go up. This creates another cycle where global environmental instability directly hurts the local economy.

So, what can be done to solve these problems? TheCityUK suggests that the private sector needs to find better ways to account for climate resilience—the ability to recover from climate-related damage—when setting insurance prices. However, they also suggest that the private sector cannot do this alone. There may need to be more government involvement, perhaps through public or partly public 'backstops'. A backstop is a form of financial support or guarantee provided by the government to prevent a total collapse of a market during a crisis.

Some experts believe that the government must take a more active role in moderating the effects of the climate crisis. As the economy faces these new pressures, the debate over how much the state should help is likely to grow. The challenge is to find a balance between encouraging private companies to manage their own risks and ensuring that the economy remains stable when disasters strike. With the frequency of extreme weather showing no signs of slowing down, these economic questions will remain at the center of national policy discussions for years to come.